Funds' Cash Levels Dip to 5.5% as Money Flows Back Into Markets

Data also show that investors are loving junk-bond funds.
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The latest mutual-fund data show that finicky stock-fund managers like stocks again, while fund investors like high-yield bonds.

Stock-fund managers

let cash mount up in their funds as stocks tanked last year, but stock funds' average cash stake dropped from 6.2% at the end of November to 5.5% in at the end of December, according to a Monday morning report from liquidity-tracker

TrimTabs.com

. That type of drop could predict brighter days for stocks.

The same report estimates that fund investors stuffed $600 million into high-yield or junk-bond funds last week and some $2.5 billion in January, the category's highest cash flows since $4.7 billion gushed through the door in November 1998. These inflows show investors are listening to the hype surrounding high-yield bonds after a string of lousy years.

Fund flow figures are closely watched because shifting tastes among fund managers and fund investors can move the markets, due to the vast amount of assets in mutual funds. At the end of last year, equity funds had nearly $4 trillion in their coffers and all mutual funds had some $7 trillion, according to the

Investment Company Institute

, the fund industry's trade group. ICI data estimate fund's cash-percentage drop from 6.5% to 5.8%. Stock funds' average cash position in the 1990s was 7.6%, according to the ICI.

While many debate the value in watching fund managers' average cash positions, it may indicate what might be in store for stocks. Essentially, rising cash positions in stock funds have presaged steep gains in the stock market, because managers can send stock prices north when they pour those billions into the market. Conversely, when cash positions are inordinately low, they often predict a blue period for stocks.

There is some evidence backing up these generalizations, even recently. The average stock funds' cash position dropped each year from 1995 through the end of 1999 -- the only five-year period in which the

S&P 500

rang up annual gains of 20% or more each year. But at the end of 1999, the average stock fund's cash position was below 5%, and last year the S&P 500 lost more than 9%, with the tech-laden

Nasdaq Composite

tumbling nearly 40%. Despite an apparent gush of cash coming into the market, the S&P 500 had a modest gain in December, while the Nasdaq fell nearly 5%.

Investors' interest in high-yield bond funds, last year's worst bond-fund category with a 9.1% loss, comes after many observers predicted solid gains for junk bonds over the next one to three years. Many, including

(LMVTX) - Get Report

Legg Mason Value fund manager

Bill Miller, believe the category was unduly punished in recent years and might be due for a solid rebound. High-yield bond funds are the top bond category so far this year, with a 6.7% average gain, according to

Morningstar

.

If you're intrigued by the high-yield bond-fund category and the buzz that has surrounded them this year,

check out the recent story on hot funds in the category.

John Hancock Funds'

chief fixed-income officer Barry Evans will talk about the risky category in the Daily Interview Wednesday. Saturday's Big Screen will highlight some steady high-yield funds.